A new wrinkle — Fed official suggests ‘time horizon’ for inflation target

Narayana Kocherlakota, the president of the Minneapolis Fed, is on the dovish end of the spectrum at the Federal Reserve, and has been arguing for a few years now that the U.S. economy still needs more stimulus. On Monday night, he suggested a new wrinkle.

Kocherlakota pointed out that the Fed’s long-term goal is for a 2% annual inflation rate. But he noted the Fed doesn’t define what long-term means.

This lack of specificity suggests that appropriate monetary policy might engender inflation that is far from the 2% target for years at a time and thereby creates undue inflation (and related employment) uncertainty. Relatedly, the lack of a public timeline for a goal can sometimes lead to a lack of urgency in the pursuit of that goal. I believe that, if the FOMC publicly articulated a reasonable time benchmark for achieving the inflation goal, the Committee would be led to pursue its inflation target with even more alacrity.

The Bank of Canada, he notes, has such a policy already. Kocherlakota suggested the Fed should adopt a two-year time horizon for returning inflation to the 2% goal. The PCE price index, the inflation measure preferred by the Fed, was at 1.6% in July.

Kocherlakota also repeated his suggestion that the Fed target the price level, a proposal which hasn’t gone far with his Fed colleagues.

Kocherlakota is a voting Federal Open Market Committee member this year.